goldsgpc
7th June 2017
Best quarter for Swiss GDP (+0.3%) since June 2016
Exports are driving growth (+3.9%). Spending is disappointing (+0.1%). Inflation rises +0.5%.
Leading indicators are lagging behind. The SNB believes the Swiss franc to be overvalued.
Key points
- Best quarter for growth in Swiss GDP since June
2016 (+0.3%)
- Clear, welcome bounce back in exports (+3.9%)
- Private spending is struggling (+0.1%) despite the
unemployment rate remaining low (3%)
- Public spending rising (+0.4%)
- Temporary decline in foreign trade in April
- Leading indicators are once again wavering
- The SNB will soon hold 700 billion in currency
reserves
- The SNB still considers the Swiss franc to be
overvalued; depreciation is expected in 2017
- Bond market consolidates before upcoming rise in
long rates in Switzerland
- Generous valuation, renewed risk in equities and
listed real estate assets, despite long term
opportunities
Best quarter for growth in Swiss GDP since
June 2016 (+0.3%)
exports was a pleasant surprise in a context in which
the Swiss franc stabilised against the euro and the US
dollar in the 1st quarter.
This growth in GDP was in fact a negative surprise
for most analysts, as it was lower than expected.
However, the year on year rise is still significant as it
has headed back above +1% (+1.1%), after having
slid to just +0.7%.
The start of 2017 was set to prove positive for the Swiss
economy, particularly given the recovery in the Eurozone,
and more generally in all of Switzerland’s main trading
partners. This was at least partially borne out in the 1st
quarter. Indeed, we were expecting a more dynamic start
to the year for the Swiss economy, bolstered by stillrobust household spending, public spending making a
positive contribution, and an export recovery thanks to a
more favourable macroeconomic context internationally.
It was spending that proved disappointing, coming in
weaker than expected.
Swiss Economic Performance (GDP, millions of
CHF)
Last Thursday, SECO (the State Secretariat for the
Economy)
published
growth
figures
for
Switzerland. Swiss GDP posted better growth
(+0.3%) in the 1st quarter 2017 than at the end of
last year (+0.2%). In the 4th quarter, the Swiss
economy did not benefit from the better economic
situation, particularly in the United States and
Europe, but it seems to have caught up a little at
the start of this year, with a rather clear recovery in
exports.
However, this performance did come in slightly
under forecasts due to a rather disappointing
domestic sector and relatively stable household
spending. Nonetheless, it is encouraging to see
sectors generally affected by a strong Swiss franc
again achieving good results. The +3.9% rise in
Weekly Analysis – Best quarter for Swiss GDP (+0.3%) since June 2016
Sources: SECO, BBGI Group SA
Private spending increased slightly (+0.1%), and
thankfully public spending made a positive, although
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modest, contribution (+0.4%). Spending on investment
in capital goods compensated for the slide in the previous
quarter with a +1.7% increase. The same can be said for
the construction sector, which grew +0.4% after having
dipped at the end of the year. In the end, domestic
demand was slightly positive after taking into account
stock variations, which slowed growth somewhat. Swiss
exports behaved well once again, driven by strong growth
in the chemical and pharmaceutical segments. We should
once again highlight that the watchmaking and jewellery
sectors posted their greatest rise since 2012, reversing the
unfavourable trend of the past few months. The
macroeconomic context was relatively favourable in the
1st quarter, as European GDP growth remained rather
strong (+1.7%), with slightly disappointing growth in the
United States (+1.2%), and pleasant surprises in Asia
(Japan +2.2%, China +6.9%). In terms of currencies, the
value of the Swiss franc remained generally stable, due to
the fall in the US dollar (-1.65%), which was the natural
follow-on from the strong rise at the end of the year, the
euro seeing no change (-0.29%), the yen bouncing back
(+3.24%) from its -10% correction from the previous
quarter, and the yuan remaining relatively stable.
Unlike the previous quarter, real terms Swiss GDP
was propped up by exports at the start of the year.
Improved global growth prospects should also exert
a greater, more positive influence on the Swiss
economic climate in the coming months.
Private spending should keep its favourable trend,
propping up GDP. Public administration spending will
remain volatile in 2017, but Confederation and Canton
level accounts are in rather good shape, and debt as a
percentage of GDP (34%) remains low when compared
internationally. We see no reason to predict a drop in
public spending in 2017 and reckon on it continuing to
make a positive contribution.
Temporary decline in foreign trade
Internationally, the trade balance had a difficult 4 th
quarter 2016. The record breaking balance of 4.34 billion
Swiss francs in September was followed by half-hearted
monthly results at the end of the year. At the start of the
year, we highlighted the excellent result in the trade
balance in January, giving us hopes for a positive first
quarter, which were then realised. This historic record
(4.73 billion Swiss francs) was unfortunately followed by
rather more mixed figures, particularly with April
posting the weakest monthly result since 2014.
Swiss Trade Balance
Household spending trod water, after strong growth
(+0.9%) at the end of last year. Industry was also a
driver of growth, despite the Swiss franc still being
overvalued. The manufacturing (+3.4%) and energy
(+4.4%) sectors made a positive contribution to
economic growth. With the exception of health and
social work, the services sector did not make a positive
contribution, unfortunately. The Swiss economy is still
standing strong in the face of the appreciation of the
Swiss franc and the change in monetary policy in 2015,
but it is struggling to really recover despite the fact that
the European and US contexts are now a little better
and that the foreign value of the Swiss franc is relatively
stable.
Sources: Bloomberg, BBGI Group SA
Private spending is struggling despite the
unemployment rate remaining low
Foreign trade should recover thanks to an export
recovery in 2017, for it to make a truly positive,
lasting continuing to GDP growth.
Whilst not approaching its record of +2.5% in 2008, the
unemployment rate in Switzerland is still low, sticking at
3.3%, though this has not boosted spending.
Nevertheless, household confidence has been regularly
improving for more than a year, approaching the levels
of 2013. Disposable household income has also
increased since 2015, and analysis of future financial
conditions has also improved significantly since the start
of 2017. This indicator is currently set to overtake the
previous peak hit in 2013, in doing so showing similar
optimism to that seen in 2009.
Weekly Analysis – Best quarter for Swiss GDP (+0.3%) since June 2016
The watchmaking sector is trailing (-5.7% since start of
the year), and it is posting corrections with two large
partners, the United States (-19%) and Hong Kong (16.8%). This is partially compensated for by a recovery in
exports to China (+38.9%). The economic slowdown in
the United States in the 1st quarter shouldn't last, which
should also enable the business climate in the rest of the
world to improve.
The improvement in global prospects for 2017 will
benefit the Swiss economy and Swiss exports.
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Leading indicators are once again wavering
The latest leading indicators published still show
sustained economic activity in Switzerland, but the
hesitation is palpable, both in the manufacturing sector
and in services. The manufacturing PMI indicator slid
from 57.4 to 55.6 in May. The leading indicator for new
orders improved, up from 58.7 to 59.5. Although
slightly down on its peak of 60.3 in December, it is still
suggesting that activity will step up in 2017. Most
subsegments are also pointing to stabilisation of the
growth rate in Switzerland. Equally, the spending
climate is gradually improving, as suggested by measures
put in place by SECO and UBS, as well as investor
confidence, which has leapt since January. The tendency
toward some hesitation is backed up by the fall in the
KOF barometer from 106 to 101.6 points.
PMI - KOF
continue to take action to try to correct the overvaluation
of the Swiss franc.
SNB currency reserves are only increasing, and will
certainly hit 700 billion before the end of the quarter.
The yield differential is much more favourable after
the rise in US dollar rates, but remains broadly
unchanged against the euro, at around 50 basis
points.
Nonetheless, we believe that it is now more likely
that rates will normalise more quickly in the
Eurozone than in Switzerland, in so doing favouring
the euro.
Our exchange rate forecasts are still relevant. For the time
being, the economic trend both in the United States and
in Europe lacks the strength needed to trigger further
rises in the US dollar and the euro, but we still believe it
likely to see a new trend of weakening of the Swiss franc.
This should bring the US dollar above 1.05 and the
euro above 1.10.
Exchange Rates and SNB Reserves
Sources: Bloomberg, BBGI Group SA
After
a
period
characterised
by
some
disappointments in economic data, the Swiss
economic situation should gradually improve. We
believe that the monetary element should also
become more positive, thanks to the the US dollar
and other currencies continuing to appreciate
against the Swiss franc.
The SNB will soon have 700 billion in currency
reserves
Despite the decrease in economic uncertainty, first and
foremost in the United States and Europe, but also in
most other economies, the Swiss franc remains
overvalued and is still sought after by investors. Though
the appreciation has not been enormous, we are still
seeing some demand for the Swiss franc, despite banks’
negative interest rates due to policy imposed by the
SNB. Even political risks seem to have reduced overall.
Political uncertainty has certainly risen in the United
States, but overall we believe that this improvement in
the economic climate should reduce the demand for
Swiss francs. For the time being, the SNB should
Weekly Analysis – Best quarter for Swiss GDP (+0.3%) since June 2016
Sources: Bloomberg, BBGI Group SA
Consolidation before upcoming rise in long rates
in Switzerland
Six months ago, the US presidential elections considerably
changed growth and inflation prospects. After widespread
rises in long rates, a wait-and-see strategy has dominated
over the past few months in order to sound out any real
change in the new president’s economic and fiscal policy.
Elsewhere in the world, particularly in Switzerland, this
attitude has led to an initial rise in long rates, followed by a
period of horizontal consolidation. Over the last few
weeks, underlying inflation, as well as other broader
measures of inflation, have been pointing to prices heading
back up. As we had expected, normalisation of long rates
began last summer with high correlation, despite varied
economic and political situations. Swiss ten year rates
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bounced back from -0.6% at the start of July, stabilising
at just above zero. In this context, the long rate
differential between the German Bund and Swiss bonds
is stable at 0.5%, which is still certainly short of what is
required to push the euro up.
We believe that this differential would need to rise to
0.75% to trigger a fall in the Swiss franc. Equally,
inflation in Switzerland has now exceeded 0.5%,
driving away the spectre of deflation. It should pick
up the pace if the Swiss franc drops.
10 Year EUR-CHF Interest Rates
Renewed risk for equities and real estate
The rates trend reversal has been benefiting Swiss real
estate investments and equities since the start of the year.
However, this rise now stands at nearly +15% over six
months, and we now believe it to be in risky territory.
This is also the case for real estate assets, investment
funds (+6.5%) and property management companies
(+12%), having benefited from the trend reversal in rates.
Yield remains attractive, though under 3%, while premia
could be a source of concern in the short term. The rise
in profits and dividends of Swiss assets and attractive 3%
yield may no longer be enough to hold off profit taking,
which is set to begin as soon as any loss of momentum is
seen on indices. Although the current 16x 2017 profits
valuation of Swiss equities is not excessive, we believe it is
enough to trigger some movement.
Swiss Real Estate, Equities and Bonds in 2017
Sources: Bloomberg, BBGI Group SA
Risk has clearly increased for Swiss bonds, and for
now the bond bubble can deflate in comparative
calm, with no immediate signs of panic.
Sources: Bloomberg, BBGI Group SA
We are maintaining positive prospects for these two
asset classes in 2017, but we believe it is now
increasingly likely to see temporary consolidation of
prices.
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Weekly Analysis – Best quarter for Swiss GDP (+0.3%) since June 2016
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